As a small business owner, you might have considered hiring a 1099 subcontractor. In some ways, a subcontractor can give you more flexibility than an employee. Subcontractors are responsible for their own permits and payroll taxes.

But, you must be careful when making a 1099 contractor agreement. You do not want to misclassify an employee as a subcontractor. The IRS monitors worker classification. Misclassifying workers can be costly, and you could face IRS penalties and fees.

Once you understand how to classify a worker, you can begin the hiring process for a 1099 subcontractor. Keep in mind these tips when hiring a subcontractor.

Know the history of the 1099 subcontractor

It’s important to know how the 1099 subcontractor works before you hire them. Ask the worker to see samples of their previous work. A subcontractor might have a website or portfolio.

Does the work meet your standards? Determine if the subcontractor can produce results that match your expectations.

To get more details about the subcontractor’s history, ask for references or client examples.
Speak to others that have been involved with the subcontractor to get a snapshot of their work. Ask for at least two references.

If the subcontractor must carry a license or permit, be sure they are licensed. Check if your state requires 1099 subcontractors to have a license. Without a license, you may be liable for accidents during the project.

Always have a written 1099 subcontractor agreement

Before you hire a subcontractor, create a written agreement. A standard subcontractor agreement form will help you if the IRS questions the worker’s status. The 1099 subcontractor agreement also clarifies the expectations of all involved parties for the project.

In a standard subcontractor agreement, include details about the fee structure, payment terms, and cancellation policy. Also, note any due dates for payments, and dates for the start and completion of the project.

Outline how the subcontractor will perform the work in the agreement. Make a record of the characteristics of their work to show the worker’s status is 1099 subcontractor.

Both you and the subcontractor should sign the agreement before beginning work. If you have any issues while the subcontractor performs work, consult the agreement. Deal with issues according to the terms you agreed on.

Have the 1099 subcontractor fill out Form W-9

When you work with a 1099 subcontractor, you are not responsible for payroll tax withholding. The subcontractor handles the employee and employer portions of the payroll taxes. Have the worker fill out Form W-9 to show they will be handling all the payroll taxes.

Each subcontractor should complete Form W-9 before they begin any work. On the form, the subcontractor identifies their business structure type (sole proprietorship, corporation, etc.).

Form W-9 also asks for the subcontractor’s name and Taxpayer Identification Number (TIN). The TIN can be a Social Security number or an Employer Identification Number (EIN).

Keep the completed Form W-9 on file. At the end of the year, use Form W-9 to complete Form 1099 for each subcontractor you paid. This shows the IRS the income the subcontractor received from your company. Also, file Form 1096 to show the total amount you paid to all your 1099 subcontractors.

Be sure the Form W-9 is up to date each time you work with a subcontractor. Keep Form W-9 on file for at least three years.

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This article was originally published 2/6/2013.